Special Update: The Oil Price Decline in 4 Charts Weekly Update – December 15, 2014

Image courtesy of FreeDigitalPhotos.net/Jetkasettakorn

Image courtesy of
FreeDigitalPhotos.net/Jetkasettakorn

Markets were jarred by plummeting oil prices last week, giving the Dow and S&P 500 their worst weeks of 2014.1 For the week, the S&P 500 lost 3.52%, the Dow fell 3.78%, and the Nasdaq dropped 2.66%.2

Markets reacted badly to crude oil’s slide largely because of its economic implications for oil producers like Russia. What’s bad for Russia is bad for its largest trading partner – Europe. Though the U.S. economy is doing well, economic troubles in Europe could be potentially bad for U.S. companies.3

Though it can be depressing to experience a market drop so close to the end of the year, there may be a silver lining to oil’s decline. In this week’s update, we’re taking a look at some of the short- and long-term factors behind the drop in oil prices.

Since June, the price of Brent crude, one of the most commonly used crude oils, has fallen from a high of $115.19 to the current low of $65.64.4

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In the short term, the rise of the United States as an oil-producing power has pushed up global oil supplies, thus depressing oil prices.

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In November, the Organization of the Petroleum Exporting Countries (OPEC), an international group that coordinates oil production between members to stabilize prices, met to determine production quotas. While the group, whose members control 40% of global oil supplies, could have acted to reduce the oil glut by cutting production, they voted to maintain current production levels, sending oil prices even lower.5 While it may seem crazy, it’s likely that OPEC members are seeking to drive smaller producers out of the market.

On the other side of the equation, economic growth in many major oil markets is stalling, reducing the demand for oil. Developed countries have also made major strides in reducing energy use and increasing efficiency. All this spells declining demand in many markets. Global oil consumption estimates have been cut four times this year as the oil industry struggles to come to grips with changing fundamentals.6

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Other long-term factors may affect future oil demand. Economists predict that U.S. gasoline consumption will flatten and contract in coming years.7 Demographic trends in the U.S. suggest that domestic demand may fall as baby boomers retire and reduce their driving; Millennials, members of the largest generation in U.S. history, are moving to cities and using alternative transportation in increasing numbers. Use of renewable energy sources is also on the rise and expected to continue, though cheap oil may make alternative energy less fiscally appealing.

What does cheap oil mean for the U.S.?

On the positive side, lower prices will likely boost consumer sentiment and increase discretionary spending, which is great news for U.S. businesses. Based on U.S. Highway Administration estimates, this year’s gas price drop has translated into over $1,000 in annual savings for the average American household.8

On the other hand, the U.S. is becoming a serious oil producer and low prices are bad news for domestic oil producers. The economic viability of U.S. shale oil production (the source of its recent oil boom) relies on high oil prices to offset expensive extraction. One metric used by energy analysts is the “breakeven price,” which is the oil price needed for projects (or producers) to make a healthy return. Can shale oil producers survive in a world of dirt-cheap oil? Opinions differ; the chart below shows the estimated breakeven price for several shale oil projects.

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While some projects may be able to survive low oil prices, one estimate puts the average breakeven price of U.S. shale projects around $65-$70/barrel, indicating that many are vulnerable to low oil prices.9

Globally, oil price instability and continued downward pressure could mean bad news for major producers like Saudi Arabia and Russia that depend on oil revenues to make debt payments. While some countries have large cash reserves that will help cushion the effects of cheap oil, the long-term economic effects could be serious.

Bottom line: How Low Can Oil Go?

Well, that’s the trillion-dollar question and everyone has a guess. Government energy economists are currently forecasting an average price of $68/barrel on Brent Crude, though they admit there’s a great deal of uncertainty in price forecasts right now.10

Are oil and gasoline prices going to remain this low? Hard to know. The prices we are seeing are partially the result of speculation and bearish sentiment on oil. While fundamentals suggest oil prices will remain depressed in 2015, it’s unlikely that $2.00 gas is here to stay.11 Let’s make the most of it while we can.

Looking ahead, we can expect additional market volatility as traders take a look at their portfolios after last week’s rout. Wednesday’s Federal Reserve Open Market Committee meeting will also be in focus; analysts hope that the Fed will address how the recent drop in oil prices may affect the timing of future interest rate increases.

 

ECONOMIC CALENDAR:

Monday: Empire State Mfg. Survey, Industrial Production, Housing Market Index

Tuesday: Housing Starts, PMI Manufacturing Index Flash

Wednesday: Consumer Price Index, EIA Petroleum Status Report, FOMC Meeting Announcement, FOMC Forecasts, Chair Press Conference 2:30pm

Thursday: Jobless Claims, Philadelphia Fed Survey

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HEADLINES:
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Congress passes $1.1 trillion spending bill. After weeks of closed-door haggling and bitter partisanship, Congress passed a budget bill, funding most government agencies through September 2015 and avoiding a government shutdown.12

Retailers bounce back from Black Friday. Despite a slow Thanksgiving shopping period, new data shows that November sales increased by 5.4% over last year for brick-and-mortar stores.13

China’s economy may slide to 7.1% growth in 2015. The Chinese central bank announced that a slack domestic real estate sector could cause China to miss growth forecasts. Though China’s export sector is still growing, it’s not enough to offset the weak property sector.14

Weekly jobless claims fall. Initial claims for state unemployment benefits fell again, though continuing claims increased. The four-week moving average edged upward, though it remained below 300,000 for the 13th straight month.

The Clues Within November Jobs Report Weekly Update – December 8, 2014

Image courtesy of FreeDigitalPhotos.net/jscreationzs

Image courtesy of
FreeDigitalPhotos.net/jscreationzs

Markets ended the first week of December with a bang, rallying for the seventh straight week, though the Nasdaq gave in to selling pressure and closed slightly down. Investors used an upbeat November jobs report as an excuse to rally, giving the Dow another record close for the year. For the week, the S&P 500 added 0.38%, the Dow grew 0.73%, but the Nasdaq fell 0.23%.1

The November jobs report showed that the economy gained 321,000 new jobs last month, though the unemployment rate held steady at 5.8%. Job growth was widespread, showing improvement in several sectors of the economy.2

Another report supported the view that the labor market is making great strides. Americans quit their jobs in greater numbers in September than in any period since April 2008. Voluntary separations are a sign of increased dynamism in the labor market as workers quit to take advantage of better opportunities. Young employees are among the most aggressive job-switchers; many that were forced to take low-paying jobs early in the recovery are taking better positions. Employers, who have long held the upper hand, are scrambling to keep key workers, and recruitment for many in-demand areas is up.3

What does this mean for the economy? Hopefully, higher incomes, increased upward mobility, and higher consumer spending. We may also see increased demand in the housing market as household formation among young Americans – which dropped precipitously during the recession – picks up.4

Black Friday numbers came in last week and showed that spending over the Thanksgiving weekend unexpectedly dropped about 12% over last year.5 While the results are quite puzzling, given the general improvement in consumer fundamentals, research shows that Black Friday trends are not strongly correlated with overall holiday season shopping.6 Though the early numbers are a bit of a disappointment, there’s still room for a solid retail season.

 

ECONOMIC CALENDAR:

Tuesday: JOLTS

Wednesday: EIA Petroleum Status Report, Treasury Budget

Thursday: Jobless Claims, Retail Sales, Import and Export Prices, Business Inventories

Friday: PPI-FD, Consumer Sentiment

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HEADLINES:
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Gas prices fall below $2.00/gallon. Pump prices for regular unleaded plummeted across the nation, dropping below $2.00/gallon in Oklahoma. With prices this low, the spread between area prices is growing; Hawaiians have the highest average prices at $3.883.7

Factory orders fall for third straight month. New orders for factory goods fell in October for the third month in a row, indicating that manufacturing activity may have slowed down in the fourth quarter.8

Federal Reserve Beige Book report optimistic about economy. The Fed’s assessment of economic conditions across the country in October and November shows important gains in business conditions and employment, though the housing market remains an area of concern.9

Black Friday deal making drives auto sales. U.S. sales of light vehicles grew 5% year-over-year in November, driven by attractive deals, lower gas prices, and increasing wages. Though the November volume may chip away at December sales, the fundamentals are in place for a solid quarter for automakers.10

Holiday Season Kicks Off With Bang Weekly Update – December 1, 2014

Image courtesy of FreeDigitalPhotos.net/stockimages

Image courtesy of
FreeDigitalPhotos.net/stockimages

After a choppy October, November was a very good month for stocks. Falling oil prices, new moves by central banks, and solid domestic fundamentals gave both the Dow and the S&P 500 new record highs. For the month, the S&P 500 gained 4.29%, the Dow grew 5.03%, and the Nasdaq added 5.33%.1 Last week was packed with economic data and despite the shortened trading week, stocks managed a win. For the week, the S&P 500 edged up 0.20%, the Dow added 0.10%, and the Nasdaq grew 1.67%.

The second Gross Domestic Product estimate came out Tuesday and showed revised growth of 3.9% in the third quarter, significantly higher than the original 3.5% estimate. The second release is based on more complete data and reflects increased growth in multiple sectors of the economy.2 This is good news for the fourth quarter if the growth can be maintained.

The critical holiday shopping season kicked off with a bang, with retailers starting their Black Friday deals as early as Wednesday or Thursday. Early estimates suggest that 55% of consumers shopped online or in stores over the Thanksgiving weekend and spent an average of $380.95 per person.3

Since the holiday season accounts for about 20% of total 2014 retail business, retailers are understandably anxious to keep the ball rolling. The CEO of Macy’s, one of the nation’s largest retailers, is cautiously optimistic about the holiday season as consumers take advantage of a burlier economy to unleash pent-up demand.4 Can the strong retail trend continue? Let’s take a look at some of the factors that may affect holiday shopping:

Petroleum prices are still falling precipitously; last week, crude oil fell to its lowest price since 2009 when the Organization of Petroleum Exporting Nations (OPEC) declined to cut production.5 In a few short months, oil has fallen from $100/barrel to $70/barrel, and it doesn’t appear that we’ve seen the bottom yet.6 Gas prices have followed oil, and a nationwide drop in gas prices are leaving consumers with more money at the holidays.

Consumer confidence, an indicator of how optimistic Americans are about their current and future financial prospects, reached its highest level in seven years as low gas prices and a strong job market boosted spirits.7 Though the correlation isn’t perfect, confidence readings are often seen as a gauge of future spending.

The latest data shows that consumer spending rebounded modestly in October after falling in September. However, the October data may not yet show the effects of the steep decline in gas prices, meaning we may see a bigger jump in November.8 All told, the fundamentals are in place for a strong holiday shopping season, which will hopefully spur additional economic growth.

ECONOMIC CALENDAR:

Monday: PMI Manufacturing Index, ISM Mfg. Index

Tuesday: Motor Vehicle Sales, Construction Spending

Wednesday: ADP Employment Report, Productivity and Costs, ISM Non-Mfg. Index, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims

Friday: Employment Situation, International Trade, Factory Orders

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HEADLINES:

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Durable goods orders mixed in October. Orders for long-lasting manufactured goods increased unexpectedly in October following two months of decline. However, core goods, which exclude volatile transportation orders, actually fell 1.3%, indicating that companies are uncertain about growth next year.9

New homes sales slow.  Sales of new homes edged up in October, but the slow pace of growth underlines how slow housing demand is. Taken together with last week’s existing home sales, analysts believe that the sector is moving into a more stable  growth phase.10

Jobless claims reach near three-month high. After weeks of improvement, weekly claims for new unemployment benefits reached the highest level since early September. Though weekly results are volatile, the number could indicate that businesses are cooling off their hiring near the end of the year.11

Energy sector hit by low petroleum prices. The recent decline in oil prices has hit energy producers hard, particularly shale extractors whose margins depend on higher oil prices. Continued softness in oil prices could cause significant consolidation in 2015.12

Assertive Moves By Major Players Weekly Update – November 24, 2014

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of
FreeDigitalPhotos.net/Stuart Miles

Markets rallied for the fifth week in a row on global and domestic good news, sending the Dow and S&P 500 to new record highs. For the week, the S&P 500 gained 1.15%, the Dow grew 0.99%, and the Nasdaq added 0.52%.1

Investors cheered on Friday when China’s central bank made its first interest rate cut in more than two years, stepping up its efforts to spur growth in the world’s second-largest economy. Slowing factory growth and a stalled housing market – both major factors in China’s historical growth – may have been behind the bank’s surprise move.2

The European Central Bank also jumped on the stimulus bandwagon and began purchasing asset-backed securities in an effort to encourage banks to lend money and boost Eurozone economic growth. While this measure is similar to the bond-buying programs implemented by the Federal Reserve (and pioneered by the Bank of Japan), it falls short of quantitative easing, which would require the ECB to take on the risk of buying the sovereign debt of its member countries. The news caused the euro to tumble; policymakers probably hope further weakness in the euro will lead to export and manufacturing growth.3

Why is all this good news for investors? These assertive moves by major players in the global financial scene are a hopeful sign that they are prepared to do what it takes to put the global economy back on track. While the U.S. is making big strides toward a healthy economy, Europe and China are lagging behind and their central banks may need to make further moves to boost growth.

On our side of the pond, last week’s unexpectedly low new unemployment claims report showed that the labor market continues to make gains. At this point, weekly claims for new unemployment benefits have been below 300,000 for ten straight weeks, which is a fantastic sign for the job market.4 Continuing claims also fell to the lowest level since 2000, indicating that many jobless Americans are moving off the unemployment rolls, though there could be some seasonal hiring factors at play.5

Looking ahead, the holiday-shortened week is packed with economic data and analysts will be looking closely at the next Q3 Gross Domestic Product estimate as well as some important consumer sentiment indicators. Thursday kicks off the critical holiday shopping season and investors will be watching to see if hopes for the retail sector can turn into reality.

 

ECONOMIC CALENDAR:

Monday: Dallas Fed Mfg. Survey

Tuesday: GDP, S&P Case-Shiller HPI, Consumer Confidence

Wednesday: Durable Goods Orders, Jobless Claims, Personal Income and Outlays, Consumer Sentiment, New Home Sales, Pending Home Sales Index, EIA Petroleum Status Report

Thursday: U.S. Markets Closed For Thanksgiving Holiday

Friday: Chicago PMI

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HEADLINES:

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Existing home sales jump in October. Sales of previously owned homes rocketed to their highest level in more than a year, suggesting that the housing market may be on the rebound. Improvements in the labor market and lower mortgage rates may boost further sales activity.6

Oil settles higher. Actions by China’s central bank and rumors that OPEC could cut oil production sent crude oil slightly higher last week. With prices so low, any bullish sentiment could start an oil rally, though conditions remain optimal for continued low prices.7

U.S. factory production falls in October. Cutbacks at U.S. automakers caused industrial production to fall unexpectedly in October, indicating that manufacturing may have gotten off to a slow start in the fourth quarter.8

Housing starts fall in October, but building permits surge. Construction on new houses fell unexpectedly last month, continuing its oscillation of the past few months. However, permits for new construction jumped to a 6-1/2 year high, suggesting that builders are optimistic about their future prospects.9

A Slow Week Ends in New Highs Weekly Update – November 17, 2014

Image courtesy of FreeDigitalPhotos.net/Idea go

Image courtesy of
FreeDigitalPhotos.net/Idea go

Markets ended a sluggish week of trading slightly up, notching another record close for the S&P 500. For the week, the S&P 500 gained 0.39%, the Dow grew 0.35%, and the Nasdaq added 1.21%.1

Though last week’s data was sparse, several important economic reports show that investors may have something to be excited about. The latest retail sales data shows that shoppers came out in droves in October, giving sales a 0.3% boost. The rise in sales is even stronger than it appears, because lower gas station sales (caused by falling gas prices) depressed retail sales growth. Excluding volatile categories like automobiles, food, gasoline, and building materials, retail sales surged 0.5%.2

Much of the increase can be attributed to lower gas prices – in freefall since July – giving consumers more discretionary income to spend. Gas now averages $2.91 across the nation;3 if per-gallon prices stay low, we could see a very healthy holiday shopping season.

In another sign of a solid retail season, Wal-Mart (WMT), America’s biggest retailer, beat earnings estimates. Same-store sales, often considered a better indicator of organic growth, rose 0.5%, indicating that shoppers are coming back. Many of Wal-Mart’s customers are low-income Americans; positive earnings results could show that many of these consumers are no longer feeling the economic pinch.4

Americans are also generally feeling much better about their prospects. Consumer sentiment rose in November to more than a seven-year high. Falling unemployment and lower gas prices boosted confidence, though many Americans are still worried about income gains.5

The week ahead is heavy with economic data on manufacturing, housing, and inflation, which could cause some volatility as investors digest reports. Analysts are also already thinking about Black Friday and the official start of the year’s biggest shopping season. With October’s better-than-expected retail sales data, low gas prices, and optimistic consumers, some are forecasting a great season for U.S. retailers. Are these tailwinds baked into stock prices yet? We’ll see.

 

ECONOMIC CALENDAR:

 

Monday: Empire State Mfg. Survey, Industrial Production

Tuesday: PPI-FD, Housing Market Index, Treasury International Capital

Wednesday: Housing Starts, EIA Petroleum Status Report, FOMC Minutes

Thursday: Consumer Price Index, Jobless Claims, PMI Manufacturing Index Flash, Philadelphia Fed Survey, Existing Home Sales

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HEADLINES:

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Great news: Americans are quitting their jobs. The latest Job Openings and Labor Turnover survey shows that workers are quitting their jobs at the fastest rate since 2008. This trend is another indicator of labor market strength because workers tend to quit jobs when they feel confident in finding better work.6

Business inventories rise 0.3% in September. Though sales remained weak, U.S. businesses added to their inventory stockpiles at a faster rate than in August. The modest rise indicates that businesses are optimistic about their ability to sell through inventory in the coming months.7

Eurozone growth rates edges upward. The latest economic figures from Europe show that the overall Eurozone grew 0.2% in the third quarter. While Germany and France (Europe’s biggest economies) posted anemic growth, Greece roared back from recession, posting 0.7% growth.8

Strong dollar and weak oil are helping Americans buy from abroad. While American companies worry about the effect a strong dollar will have on their foreign sales, Americans are benefiting from cheap oil and the strength of the currency to buy overseas goods. September import prices fell by the most in two years, led by a large drop in the cost of imported fuels.9

November 2014 Monthly Video Update

Why Do We Care About Vehicle Sales Weekly Update – November 10, 2014

Image courtesy of FreeDigitalPhotos.net/Danilo Rizzuti

Image courtesy of
FreeDigitalPhotos.net/Danilo Rizzuti

Investors doubled down on the market rally, sending the Dow and S&P 500 to new highs after Friday’s October employment situation report showed that the unemployment rate dropped again.1 For the week, the S&P 500 gained 0.69%, the Dow leapt 1.05%, and the Nasdaq added 0.05%.2

The October jobs report buoyed hopes about the labor market by showing that job growth increased at a steady rate last month, adding 214,000 new jobs to the economy. The unemployment rate fell to a fresh six-year low, edging down to 5.8%. In terms of overall gains, the labor market has added over 200,000 new jobs a month for the last nine, the longest span of such gains since 1995.3

However, many Americans are still feeling anxious about the economic recovery and their prospects. Exit polls from Tuesday’s elections showed that nearly 60% of voters felt that the economy was stuck in neutral or even going in reverse.4 Why? Some economists (including Federal Reserve Chair Janet Yellen) point to stagnant wage growth.5

Taking a look at the chart below, we see that while hiring has increased since the bottom of the recession, real compensation (adjusted for inflation) has remained fairly flat. While the economy is undoubtedly doing better, many Americans haven’t seen those gains reflected in their paychecks or career prospects.

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Most of the job gains in October came from the retail and food service sectors, which are not the well-paying jobs that we want to see.6 Much of that can be attributed to a pre-holiday staffing surge from restaurants and retailers who expect a solid holiday shopping season.

Are good jobs coming back? Yes, albeit slowly. One economist estimates that 34% of jobs gained in the third quarter of 2014 were in mid-paying industries as compared with just 21% a year ago. On the other end of the spectrum, low-paying jobs made up 39% of new jobs, as compared to 66% last year.7

October’s auto sales report also came out last week and showed investors a couple of important things: Auto sales are booming, up significantly since last year; average sale price is also up, gaining nearly 3% since October 2013; even better, price gains are outstripping incentives, meaning that car makers are able to offer fewer incentives to buyers, which is great news for firm profit margins.8 Why do we care about vehicle sales? We can treat big-ticket sales like autos as a broad proxy for overall consumer spending; generally speaking, when Americans feel well off enough to buy a new car, they are probably spending well in other areas.

Next week’s calendar is light on economic data and earnings season is largely over. With markets at new historical highs, it’ll take some pretty good news to keep buying pressure up. With a slow week ahead, it wouldn’t be surprising for investors to want to take some profits off the table and wait for more economic indicators. Analysts will be looking for Friday’s retail sales report to contextualize the surge in retail hiring. If strong shopping trends support the job growth, it may show that retailers are on track for a solid holiday season. If not, investors may worry that retailers will be hurt by high costs.

On this Veteran’s Day, let’s take a moment to honor those who serve. For your courage, hard work, and dedication to our country, we thank you. We also remember all those who have made the ultimate sacrifice for liberty – you will never be forgotten. Let’s also take a moment for our military families who have supported their loved ones from far away.

 

ECONOMIC CALENDAR:

Thursday: Jobless Claims, JOLTS, EIA Petroleum Status Report, Treasury Budget

Friday: Retail Sales, Import and Export Prices, Consumer Sentiment, Business Inventories

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HEADLINES:

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Oil price slump could affect shale oil industry. While plummeting oil prices puts money in consumers’ wallets, it could also undermine the production of domestic shale oil, which is only economically feasible with oil prices above $80/barrel.9

Factory goods orders slide in September. New orders for U.S. factory goods fell for the second month in a row in September, underscoring worries about global growth. On the other hand, unfilled orders rose, indicating that October could be a better month.10

Trade deficit widens in September. The difference between U.S. imports and exports increased as exports fell, highlighting concerns that slow global growth and a strong dollar could undermine U.S. trade.11

Construction spending falls in September. Construction outlays fell unexpectedly as private construction fell to its lowest level since October 2013. While construction numbers can be volatile, slower building could indicate a lack of business confidence in the economy.12

Upside After A Turbulent Month Weekly Update – November 3, 2014

Image courtesy of FreeDigitalPhotos.net/cooldesign

Image courtesy of
FreeDigitalPhotos.net/cooldesign

Investors took advantage of a data-heavy week and rallied strongly, raising the Dow and the S&P 500 to new records. Upbeat economic reports and fresh hope for the global economy contributed to the market’s optimism. For the week, the S&P 500 gained 2.72%, the Dow gained 3.48%, and the Nasdaq gained 3.28%.1

Market surged Friday after Japan’s central bank announced an unexpected expansion of its enormous quantitative easing program. The move came after economic reports indicated inflation (and demand) was weakening in Japan. Economists hope that pumping trillions more into the aging country’s economy will be enough to stoke economic activity.2

On the domestic side, investors got a first look at Q3 economic growth and found that gross domestic product (GDP) grew a whopping 3.5% for the quarter.3. Though GDP growth decelerated from its 4.6% pace in the second quarter, it was the fourth quarter out of the last five that the economy has grown more than 3.5%.4 Keep in mind that this is only the first GDP growth estimate, and it will definitely see revisions as more reports come in.

The Federal Reserve’s Open Market Committee met last week and announced the end of its quantitative easing programs, meaning that after October, the Fed will no longer purchase new bonds to prop up the economy.5 Though the news was widely expected, analysts are reading a bit of a hawkish tone to the Fed’s announcement. Because the Fed feels optimistic about the country’s economic outlook, some analysts think that rate hikes might come as early as Spring 2015.6 Either way, we’re confident that the Fed will look closely at all the data available before making any big decisions.

Looking ahead, analysts will be watching the European Central Bank’s meeting to see whether Europe will follow where Japan is leading. Although demand is also weakening in Europe, it’s unlikely that the ECB will take on significant asset purchases. Investors will also be watching to see whether the October jobs report supports opinions that the labor market is improving rapidly.7

Overall, investors’ fears that led to the selloff in mid-month turned out to be unfounded. Is there more room for upside after a turbulent month? If October has taught us anything, it’s that markets can turn on a dime. Though investors are feeling better about the global economic picture, fresh worries could lead to further turbulence going forward. As always, we’re continuously monitoring markets and making prudent changes where warranted.

ECONOMIC CALENDAR:

 

Monday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Tuesday: International Trade, Factory Orders

Wednesday: ADP Employment Report, ISM Non-Mfg. Index, EIA Petroleum Status Report

Thursday: Jobless Claims, Productivity and Costs

Friday: Employment Situation

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HEADLINES:

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Jobless claims rise, but remain close to 14-year lows. New claims for unemployment benefits rose slightly, but remained very close to the levels last seen in 2000. In context, these levels are 20% lower than they were last October, indicating that fewer workers are being laid off.8

Durable goods orders falter in September. Orders for long-lasting manufactured goods fell for the second month in a row, indicating that companies are reluctant to spend in the face of slowing global growth.9

U.S. wages gain most since 2008. A measure of labor costs showed that the wages paid American workers gained significantly in the third quarter, a sign that a pickup in income growth is coming.10

Gas prices drop below $3/gallon. Nationwide, average gasoline prices have dropped below $3/gallon for the first time since December 2010, driven by a glut of oil on international markets. This is a boon to American consumers, who are spending much less on transportation.11

Markets: Signal, Noise & Fundamental Factors Weekly Update – October 27, 2014

Image courtesy of FreeDigitalPhotos.net/cooldesign

Image courtesy of
FreeDigitalPhotos.net/cooldesign

After several weeks of dismal performance, equities shook off their worries and rallied enthusiastically on solid quarterly earnings giving the S&P 500 its biggest weekly gain of the year. For the week, the S&P 500 gained 4.12%, the Dow grew 2.59%, and the Nasdaq surged 5.29%, erasing much of their losses from previous weeks.1

Last week, we discussed some of the factors behind the recent pullback; what changed in a single week? Fundamentally, very little. However, investors regained their optimism on the reminder that many companies are still doing quite well in the economic recovery. Traders also took the opportunity to buy the dip, which added buying pressure, pushing markets up.

Markets are fundamentally forward-looking, and while global growth fears remain, investors are looking at the earnings growth picture, and realizing that the picture looks reasonably good. Not great, to be sure, but so far, S&P 500 firms are reporting 4.1% year-over-year earnings growth on 4.7% revenue growth, with about 41% of the S&P 500 firms reporting as of October 24.2 If we leave out the struggling Finance sector, earnings growth jumps to 5.5%. These results are largely in line with performance in recent quarters, though earnings growth is below the four-quarter average, largely because of weak performance in the Finance and Technology sectors.3  All told: Firms seem to be holding their own and turning profits, despite some weak demand issues.

Does this mean that the pullback is over? Hard to say. Markets are responding more to perception and noise than they are to fundamental factors right now. That means that more turbulence – and perhaps downward movement – can be expected in coming weeks. On the other hand, if earnings and economic fundamentals continue to look good, we may see a continuation of the rally.

Looking ahead, earnings reports from the energy and healthcare sectors will dominate this week; the two sectors represent opposite sides of the market. Healthcare was one of the big success stories of the year, while energy companies have struggled with declining oil prices.4 While analysts expect weak results from many energy firms, they will be paying close attention to forward guidance; if energy leaders foresee a weak global economic environment, investors could respond with another attack of the nerves.

The week ahead is also heavy in economic data, with the Federal Reserve’s Open Market Committee meeting and a first look at Q3 Gross Domestic Product (GDP). The Fed is widely expected to announce the end of quantitative easing at this week’s meeting; analysts also expect the formal announcement at the end of the meeting to signal a more cautious Fed and their desire to let economic data decide future policy moves.5

Altogether, a big week ahead. We’ll keep you informed.

 

ECONOMIC CALENDAR:

 

Monday: Pending Home Sales Index, Dallas Fed Mfg. Survey

Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement

Thursday: GDP, Jobless Claims

Friday: Personal Income and Outlays, Employment Cost Index, Chicago PMI, Consumer Sentiment

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HEADLINES:
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Jobless claims remain close to 14-year low. Jobless claims inched higher last week, but stayed below pre-recession levels, suggesting that the labor market is firming up. The four-week moving average of claims, considered to be a less volatile measure, fell to the lowest level since May 2000.6

New home sales at six-year high. Purchases of new single-family homes rose to a multi-year high in September, though revisions to August numbers suggest sales remain on a lower trend. Single-family home sales tend to be volatile, but lower mortgage rates could spur more sales.7

European Central Bank fails 25 in stress test. The ECB failed 25 Eurozone lenders during a series of financial health tests. Though banks have improved markedly since last year’s tests, a few still have to raise more capital to protect against another potential financial crisis.8

Inflation indicator remains tame. Overall consumer prices rose a tepid 0.1% in September after falling 0.2% in August. Year over year, headline inflation is up 1.7%, indicating that inflation remains soft and is giving the Federal Reserve breathing room to manage interest rates.9

Protecting Your Sensitive Financial Information

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of
FreeDigitalPhotos.net/Stuart Miles

In October, hackers accessed the personal information of over 83 million JP Morgan Chase customers. Fortunately, the hackers weren’t able to access financial information or gain access to client accounts. However, they were able to access the names, phone numbers, addresses, and email addresses of any current or past customer who logged into Chase.com, JPMorganOnline, Chase Mobile or JPMorgan Mobile.1,2 This unprecedented cyber-attack on a major American financial company naturally raises questions about the state of security in the financial services industry.

While there are a lot of questions still being answered, there is some good news to take away from this incident:3

  • No money was taken from client accounts and it doesn’t appear that financial databases were accessed at all. No fraudulent transactions have yet occurred using client information.
  • S. law enforcement and intelligence services are working closely with financial institutions to glean information and prevent future attacks.
  • This serious attack is a wake-up call for the whole industry that a coordinated hacking attack, possibly with the tacit support of foreign governments, can have a major impact on financial institutions. This realization will likely result in some major changes to security protocols at financial institutions.

Financial data theft is a major problem that can affect anyone. Though statistics on this type of data breach are scarce, it’s safe to say that millions of Americans are at risk. Fortunately, there are many ways that you can protect yourself from identity theft and fraud. Most of these actions are common sense, but they’re worth passing along to your loved ones:

  1. Be wary of emails or social media messages asking you to log into a financial account. Your bank, mortgage company, investment account, or the IRS will never request personal information by email. Never click on links embedded in those emails; instead, always log into your accounts by manually typing the web address into your browser.
  2. Never give out personal information in response to a phone call from someone claiming to represent the IRS or a financial institution. If you get a suspicious phone call, hang up and call the organization directly for more information.
  3. Protect your sensitive information by collecting mail promptly and shredding documents containing account numbers, credit card numbers, or your Social Security number.
  4. Never use the same PIN or password for multiple accounts or websites. Doing so increases the risk that a single attack could compromise your identity or result in fraud.
  5. Monitor your financial and credit card statements carefully to identify suspicious activity. If you find fraudulent transactions, report them to the relevant institution immediately to reduce your financial liability.
  6. Check your credit report each year at each of the three reporting agencies. You can check your report for free at com. If you find fraudulent accounts or activity that you don’t recognize, immediately file a report with all three agencies and place a security freeze on your account to prevent more accounts from being opened.

We take security very seriously and are committed to protecting our clients’ personal information in the following ways:

  • We partner with major financial institutions that use industry-recommended encryption to protect your data;
  • We never share any personal or financial information without your explicit knowledge and consent;
  • We regularly participate in audits of our internal procedures to help ensure that we are always following industry best practices;
  • We regularly update our knowledge and attend specialized training about security.

If you’re worried about how you may have been affected by a data breach or have questions about protecting your sensitive personal information, please give our office a call. We are happy to be a reassuring source of information and assistance.